I am a MA/MBA candidate at the Lauder Institute and the Wharton School of Business. I focus on Russian politics, economics, and demography but also write more generally about Eastern Europe. Please note that all opinions expressed here are mine and mine alone and that I do not speak in an official capacity for Lauder, Wharton, Forbes or any other organization.
I do my best to inject hard numbers (and flashy Excel charts) into conversations and debates that are too frequently driven by anecdotes. In addition to Forbes I've written for True/Slant, INOSMI, Salon, the National Interest, The Moscow Times, Russia Magazine, the Washington Post, and Quartz.
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Gazprom Isn't Being Run By Evil Geniuses, It's Being Run By The Keystone Cops

The other day I wrote about how Gazprom, Russia‘s natural gas export monopoly and one of the major levers of the country’s foreign policy, was in pretty tough straits and that it had good reason to fear an EU probe into its anti-competitive practices.

The reason I think that Gazprom should take the EU probe so seriously is that it appears to be pulling prices for its gas out of a hat: when you look at the prices Gazprom charges its customers and the amount of gas they actually buy there isn’t any meaningful relationship. Additionally, and even more strangely, there didn’t seem to be any relationship between a country’s relationship to Russia and the price if paid for Russian natural gas: two countries with poor relations with Moscow the United Kingdom and the Netherlands, had the cheapest prices for gas while several countries known for being friendly, such as Serbia and Greece, paid a great deal more.

A friend from graduate school suggested a possible answer to the riddle: Gazprom’s prices are correlated with the share of the gas market it held in each country. According to this theory, you would expect Gazprom to charge more in countries where it held a monopoly or near-monopoly position, and less in countries where it was just another player in the market. This sounds like a very plausible theory, and in order to test it I marched over to Eurostat to look at natural gas consumption and imports to determine Gazprom’s overall share of each market. When I compared the share of Russian gas in a given market to the unit price that Gazprom charged, I got a graph that was just as nonsensical and bizarre as the one I produced yesterday:

This makes me think that my theory about Alexey Miller throwing darts at a big map of Europe was closer to the truth that not. The story that this graph tells is not that Gazprom is cruelly using its monopoly position to fleece its unwilling customers. No, the story that it tells is that Gazprom doesn’t have the faintest idea what it’s doing and is basically just winging it. You have countries, like Finland and Slovakia, that are entirely dependent on Russian gas not only paying two very different prices, but also paying less than many countries, like Poland, that get barely 50% of their gas from Russia. This isn’t an evil plan, it looks like basic incompetence of the sort that you wouldn’t expect to see from a newly minted MBA, much less a massive globe-spanning energy empire.

And that’s part of why I think that, if it wants to survive, Gazprom is going to have to make major changes to the way it does business. There’s simply no way that, in an increasingly competitive global energy market, a company as large as Gazprom can continuously price its product in such a completely arbitrary way. It is possible to get away with such “F*** you, pay me!” tactics for a certain period of time, and in Gazprom’s case for a very long period of time, but they completely poison the business relationships that are at stake, inevitably alienate customers, and weaken long-term demand for the product being sold. The chart above does quite a lot to explain why Europeans are so furiously trying to wean themselves off of Russian gas: there’s very little predictability or rationality in the process.

Does this mean that Gazprom is going to collapse? No. But it does mean that business as usual is increasingly unfeasible with each passing day. And, of course, the longer that Gazprom tries to stymie change, the more wrenching that change will eventually be.

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It’s a wishful thinking on Adomanis’ part when he says Gazprom needs to do anything. EU needs Russia for political reasons, at least so that it does not militarily oppose France and UK aggression in Africa and ME and they also need gas.

Gazprom should disregard and will disregard EU temper tantrums. It can also export its gas to SK, Japan and China and it will do more of that if EU gives it a hard time. It’s fair to say, Adomanis is not an energy guru. Precisely because Poland and Baltics are likely to be confrontational, their price is higher and it should be. It is a whip and a candy politics, политика кнута и пряника (stick and carrot in English parlance).

Hungary, Austria and Turkey received a discount because of their consent and cooperation in the South Stream agreement, Finland is getting a cheaper price because of their North (NORD) Stream cooperation. Bulgaria is not getting as much a discount because they benefit financially from the South Stream and Russia wanted them to have an incentive to complete the South Stream project from which Bulgaria will benefit more than other transit countries. The Baltics are not needed by Russia very much at all, so their price reflects this.

People on the streets of Moscow would appear to walk at random directions, but it is not really so, every one is deterministically motivated. So what would appear random to Adomanis is not random at all. What is really random and bizarre is the irrational Russophobic stuff he posts on Forbes.

Adomanis, did you change your pants after you wrote this pathetic anti Russian hate piece? You were told by others you need an editor to have a reality check on your semiliterate scribble. It sounds like you were in a frenzy and out of control. Get on meds to get your typing connected back to your brain or to whatever you have instead of it.

The Lithuanian trolls have been replaced by Russian trolls. (Well, sort of. I suspect ivan ivanov and Sergey Levin are the same person, and the former is certainly one Leon Lentz – also a pseudonym – who is a Russian-Jewish mathematician who emigrated to the US and then came back; at least, that’s his story).

I understand you have a lot of time on your hand and are itching to tell a story that I am somebody else, which is OK with me. However, I do not give a rat’s ass for who you are, probably some Adomanis’ sidekick, холуй-шестерка, qu-ers probably can go to some other sites where sc-m like you congregate or just go f-k yourself, as far as I am concerned.

Not every analysis can be done with a 5 minute plot of X vs Y, that’s why there are statisticians and data analysts.

These deals are not identical and they were not signed at the same point in time. For one, you’re leaving out the date when these contracts were signed and the market spot-price for natural gas at the time. You’re also ignoring the length of the contracts. Presumably, longer contracts would also give more of a volume discount. You’re also ignoring any secondary deals that were made when these prices were negotiated, for example, the building of the “Banatski Dvor” underground gas storage facility in Serbia, a fact I learned with 30 seconds of Googling.

You can’t just plot some data on a graph with two axes and declare it makes no sense if you can’t fit a line to it. It’s much much more likely that you’re just not controlling for enough other variables. The whole notion of plotting the terms of international contracts on a graph is pretty silly to begin with.

My whole argument is that Gazprom isn’t going to be able to do these sorts of long-term contracts anymore because they’re incredibly unfavorable to consumers and end up resulting in absurd price distortions. The fact that Gazprom is shelling out billions of dollars in rebates and that its export volumes are shrinking would seem to suggest that this isn’t a totally lunatic interpretation

I don’t see why Gazprom cannot continue to do pretty much as it is doing, even supposing it were run by howler monkeys rather than the Keystone Cops, so long as it has gas to sell and its customers need gas. In the case of the UK, demand for gas is increasing steadily while available alternate supplies are unable to keep up, and projections to 2015 show Russian gas still by far the largest source of supply – nearly a full 10 Bcf higher than LNG imports, which some have hailed as England’s saviour.

http://www.theoildrum.com/story/2006/4/7/192346/7389

Meanwhile, MIT forecasts Russia’s share of the Asian market to grow to 30% by 2030 and 50% by 2050. Granted, it’s very difficult to predict what will happen that far out regardless the steadiness of the model, but the forecast is definitely for growth rather than contraction.

http://mitei.mit.edu/system/files/NaturalGas_Sup_Paper3.1.pdf

Unless another major producer starts to muscle in, there will be little incentive for Gazprom to dramatically change its ways beyond the incremental reforms it will have to make to remain competitive. Customers get to dictate changes when they have more of the commodity than they can reasonably use. Is that the situation? Oh, I know it was supposed to be, because of “the big game-changer”, shale gas. But is it really?

“My whole argument is that Gazprom isn’t going to be able to do these sorts of long-term contracts anymore because they’re incredibly unfavorable to consumers and end up resulting in absurd price distortions”

Well, Mark, isn’t it what the monopoly is all about – the absurd high prices and absurd behavior ? Gazprom is most definitely the monopolist for very simple reason – huge amounts of gs in Russia and not so much in the rest of the world. And the real long-term trend is that The World will pay more and more for the gas, not the other way around. So, most likely you are wrong in your long-term predictions.

Adomanis: Yes, you are totally senseless one liner person, who does not understand anything involved enough, the details, the lengthy research and deep thinking is not your forte. You think with short cliches and you hate Russia. Hence, the slogan driven absurd you publish. Gazprom is in a very good shape and it’s exports will grow. You compensate for your mental scarcity with the abundance of stupidity.

Whenever Adomanis brings up charts, data, statistics, almost everything is a lie. For example, his chart is incorrect. Poland has received 15% discount and they are currently paying about $450 per thousand cubic meters.